Aon to pay $4.9 billion cash and stock for Hewitt Associates

Insurance broker expands further into consulting; stepping up rivalry with Marsh

By

AlistairBarr

CynthiaLin

NEW YORK (MarketWatch) -- Aon Corp., the world's largest insurance broker, said Monday it has agreed to buy Hewitt Associates for $4.9 billion, a move intended to expand further into the human-resources consulting business and step up competition with main rival Marsh & McLennan Cos.

The cash-and-stock deal values Hewitt
HEW, +0.00%
at $50 a share, a 41% premium over the shares' July 9 closing price.

Half of the transaction will be paid in cash and the other half in Aon
AON, -0.43%
stock.

Terms call for Hewitt stockholders to receive $25.61 in cash and 0.6362 of a share of Aon common for each of their shares.

Shares of Hewitt jumped 32% to close at $46.79, while Aon stock dropped 7.1% to $35.62. Based on Aon's current share price, the company's offer values Hewitt at $48.27 a share.

Under Chief Executive Greg Case, the Chicago-based company has been selling businesses to focus on insurance brokerage. Aon bought reinsurance broker Benfield in 2008 for $1.4 billion. Read about Aon's Benfield acquisition.

Despite the emphasis on insurance brokerage, Aon has retained a consulting business. The company's deal for Hewitt suggests it's committed to keeping and expanding this part of its operations.

It also puts the buyer in more direct competition with Marsh & McLennan
MMC, +0.35%
another major insurance broker that owns consulting businesses Mercer and Oliver Wyman.

If the deal goes through, Aon will get about 60% of its revenue from insurance brokerage and 40% from consulting, similar to Marsh & McLennan's current business mix, according to Brian Meredith, an analyst at UBS.

"While the transaction creates execution risk, it gives Aon more leverage to a global economic upturn," Meredith wrote in a note to investors Monday. He kept his buy rating and $50 price target on Aon stock.

'Little to no synergies'

Other analysts weren't so comfortable with the deal.

"Aon's acquisition significantly expands its consulting revenue base at a time when we think it should be decreased," Rob Haines and Craig Guttenplan, analysts at fixed-income research firm CreditSights, wrote in a note to investors.

"Aon's strategy seems like a page out of the old Marsh Mac playbook," they added. "We prefer insurance companies that are insurance companies. H.R. consulting and the insurance-brokerage business have little to no synergies."

Aon expects the Hewitt deal to dilute projected GAAP-basis earnings for 2011 by 8.4% and sees returns from the deal hitting the bottom line starting 2012, for 1.2% accretion, it said. In total, stockholders can expect $1.5 billion of net value generated from the merger, the company said.

The deal's expected to yield savings of about $355 million a year through 2013, mainly from back-office staff reduction and the shedding of overlapping technologies.

"While Hewitt has already gone through meaningful cost savings in the last couple of years, we note that Aon beat its initial cost savings and EPS accretion forecast with Benfield," Meredith said.

"The expected long-term operating margin of the combined company is 20% versus our estimate of low to mid 20s for Aon as a stand-alone company," Meredith added.

However, Hewitt has historically traded at a premium to Aon. Rival Marsh & McLennan, with its similar business mix to the combined entity, trades at a 12% premium to Aon, based on 2011 earnings estimates, Meredith also noted.

Based on the agreement, Hewitt is to be integrated with Aon's consulting and outsourcing arm, under the new name Aon Hewitt. Russ Fradin, Hewitt's CEO, is slated to head the combined business.

Aon reported pro forma revenue of $4.3 billion for fiscal 2009, nearly half of which would have been generated from the combined consulting business and 40% from benefits outsourcing. Together, Aon and Hewitt would cover more than 120 countries worldwide.

To help pay for the cash part of the deal, Aon will get loans from Credit Suisse and Morgan Stanley. It's getting $1 billion in bank term loans and a $1.5 billion bridge loan.

The transaction is expected to close by mid-November, pending shareholder and regulatory approvals.

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